ab25 January 2024Global Research and Evidence LabAPAC Economic PerspectivesBNM: Steady policy rate, steely eye on inflation Policy rate unchanged at 3.0% p.a, in line with UBS and consensus In line with consensus and UBS expectations, Bank Negara Malaysia (BNM) left the overnight policy rate (OPR) unchanged at 3.0% p.a., where it has been since May 2023. The policy statement appeared to downplay weaker growth and current soft inflation rates, noting that "overall growth for 2023 expanded within expectations", despite the weaker-than-expected advance Q4 GDP growth of 3.4% y/y (Cons: 4.1% y/y), which means full year growth (3.8%) likely undershoots the government's forecast of around 4%. BNM's statement also implied that while inflation has cooled, it was mainly due to supply factors (not demand), and repeated its mention of risks stemming from changes to price controls and subsidies. We maintain our view that BNM will hold its policy rate constant throughout this year, bucking the regional trend for rate cuts, as it views its policy stance as supportive of the economy. Upside risks to inflation in H2 2024 BNM attributed the moderation of headline and core inflation in 4Q23 more to "lower cost pressures" (i.e. supply-related), while emphasizing that demand conditions were "stabilising", and would remain stable in 2024 with "resilient domestic expenditure". Headline CPI inflation has been on a steady moderating path, falling to 1.5% y/y in December 2023, below its 10-year historical average of 2%. Nonetheless, the most recent data showed an uptick in inflationary pressures. In sequential terms, headline (core) inflation climbed up to 0.2% (0.3%) m/m sa in December from an average of 0.1% (0.1%) m/m sa over the previous six months. Furthermore, the government's intention to introduce a targeted RON95 (petroleum) subsidy in 2H 2024 poses upside risks to inflation. We assume a cumulative 10% rise in petrol prices, which means that inflation takes a step-up in H2 2024, to around 3% by the end of the year. Risks to our inflation forecast (2.2% in 2024) are skewed to the upside. BNM continues to believe the tech upcycle will support growth in 2024Based on the advance GDP numbers released on 19 January, Malaysia showed a weaker-than-expected GDP growth of 3.4% y/y in Q4. Under the assumption of similar seasonal factors as last year, GDP contracted by 1.5% q/q sa, and this deceleration was broad-based across manufacturing, construction and services. This implies the full-year growth would fall below government's target of 4-5% in 2023, and we revise our forecast down to 3.8% accordingly, while maintaining our 4% growth forecast in 2024. In the policy statement, BNM further confirmed that "there are further signs of recovery in the electrical and electronics (E&E) sector" and sounded confident on tech upcycle with "upside risks to grow...
